Ford Is Doing The Balancing Act

Published 1:50 pm, Wednesday, May 29, 2013

Ford’s goal is simple - to earn profits. It is well aware that Europe will take time to recover, so meanwhile, it is working on maximizing the gains from its other markets.

Currently, North America is Ford’s growth engine, where the company is outperforming the industry and all its peers. Between January to April this year, the U.S. auto market has grown by 7%, while Ford has increased its sales by 13%. This is ahead of the 10% increase by General Motors and 8.5% by Chrysler, which is owned by Fiat.

Hence, the company is significantly boosting its capacity in North America. But, it is doing so without making too heavy investments. Meanwhile, it is shuttering unprofitable operations elsewhere and cutting losses.

The capacity boost in North America

Ford’s North American turnaround has mostly been a story of capacity optimization. Over the last decade or so, the company has brought down the number of its assembly plants in North America to 11 from the erstwhile 20. Meanwhile, it has increased utilization from one or two shifts to the present situation, where three-fourths of its plants are running three shifts at around 114% utilization.

It's no wonder Ford has astounding margins in its North American operations, which none can rival. In the first quarter, Ford’s operating margin was around 11%. It earned $2.44 billion in pre-tax earnings.

Ford has recently announced that it will build around 240,000 more vehicles in North America. This will all happen through additional shifts and lesser downtime. The company will be adding a third shift at its Kansas City plant, which produces the highly-in-demand F-150 pickup trucks.

It will also add an extra shift at its assembly plant near Detroit for production of the Fusion and Mustang. The new Fusion has taken the mid-size segment by storm. So heavy is the demand that analysts have been concerned if Ford will be able to produce enough. The company’s plant in Flat Rock, Michigan will begin production from this fall and may do three shifts from the very beginning.

At the same time, Ford will allow summer shut-down for just one week at 20 plants, instead of the customary two weeks. This alone will provide additional capacity of 40,000 vehicles. Incidentally, this is roughly equal to the annual capacity of the Australian plants that the company will be closing down.

The difficult decision in Australia

Ford has decided to shut its two Australian plants at Broadmeadows and Geelong in October 2016, which produced the Ford Falcon sedan and the Territory SUV. It is saddening to see the rule of the mighty Ford Falcon come to an end, but for the company it was a difficult, but timely, decision.

Ford has already lost over half a billion dollars in Australia due to high manufacturing costs, mostly on account of currency. Ford’s cost of production in Australia is around double that of Europe, and almost four times that of Asia.

This decision hardly signifies the company’s exit from the Australian auto scene. Ford produces only around 40,000 vehicles in Australia annually, but its presence in the country is much more than that. It has around 200 dealers across the length and breadth of the country who will keep selling cars like the Focus and Fiesta, which are currently in demand.

Ford will continue to import cars in Australia at more competitive prices from countries like Thailand and others, where manufacturing costs are much lower. So, it only makes sense that in Thailand, Ford is consolidating production of the Fiesta, which is more popular in Asia and Australia.

Consolidating in Thailand

Ford is shifting its production of the Fiesta from the Cuautitlán Assembly Plant in Mexico and the Chennai Assembly Plant in India. The company already makes the Fiesta in Thailand at its Rayong plant.

The shift is expected to happen in 2016, when Ford builds the next generation of this car on a new, more global platform. Currently, the Fiesta is going through an overhaul for the 2014 model.

The efficacy of this plan is that the Mexico plant has the capability to build multiple cars per assembly line, but so far it has produced only the Fiesta. But now, with its capacity freed, the plant can be used for making one or more vehicles that are in demand in North America.

GM and Chrysler will also minimize downtime

The way current trends are moving, researchers like LMC Automotive and TrueCar are all expecting May auto SAAR to exceed 15 million units in the U.S. And, not just Ford alone, the other Detroit car makers (GM and Chrysler) are also capitalizing on the strong demand. All three companies have gained market share through the first four months of the year, and do not want supply constraints to get in their way.

Chrysler will not allow any downtime in three of its assembly plants. These include the Jefferson North plant, which builds the Jeep Grand Cherokee and Dodge Durango, the Conner Avenue plant, which makes the Viper, and the Toledo North plant, which will produce the new 2014 Jeep Cherokee.

In four other assembly plants, there will be a week-long break, while the other assembly plants will get their usual two weeks off. The company will also keep all but one of its engine and transmission plants open throughout summer.

Chrysler is seeing strong demand for many of its vehicles. In May, some dealers are reporting that sales are up by almost 20% y-o-y. Selling hot are Dodge Wrangler and Jeep Grand Cherokee.

GM has not announced its exact plans like Ford and Chrysler, but, according to industry sources, it appears that the company will plan out its shutdowns to ensure all plants are not idled simultaneously.

GM is witnessing fantastic demand for its Buick and Cadillac models, while the market is eagerly awaiting the launch of the Silverado and Sierra pickups.The company is in the middle of the biggest product overhaul in its history. In this year alone, it is launching as many as 23 vehicles.

Last word to investors

Ford is following a balanced demand-supply strategy in each of its markets. It is making difficult decisions where it has to, like in Australia. Meanwhile, it is boosting capacity in markets like North America, where the demand is burgeoning. The way Ford is playing this game leaves no doubt in one’s mind that the Blue Oval is poised for more growth in the future, and investors have only to gain.

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